The two-term premier threw in the towel after an acrimonious political battle and backed his designated successor Haidar al-Abadi, a fellow member of the Shiite party Dawa.
"I announce before you today... the withdrawal of my candidacy in favour of the brother Doctor Haidar al-Abadi," he said in a televised address, with Abadi standing next to him.
Maliki, 64, turned the page on eight years that saw him rise from the relative anonymity of a former exile who returned in the wake of the 2003 US-led invasion to become a feared and powerful ruler.
Quelling fears a desperate bid to cling to power could worsen what is already Iraq's worst crisis in years, Maliki said he was stepping aside to "facilitate the progress of the political process and the formation of the new government."
He defended his record at the helm but critics say his sectarian policies have alienated and radicalised the Sunni minority.
The militant group, Islamic State (IS), has declared a "caliphate" straddling Syria and Iraq, hunted down religious minorities, destroyed holy sites, seized the country's largest dam and several oil fields.
The devastating militant advance has also displaced hundreds of thousands of people and posed an immediate existential threat to the world's seventh oil producer by de facto redrawing its borders along ethnic and sectarian lines.
Iraqi forces completely folded when IS forces moved in and while the Kurdish peshmerga initially fared better, the US arms retreating federal troops left behind made IS a formidable foe.
President Barack Obama said a week of US air strikes had broken the siege on a northern mountain where civilians had been hiding from jihadists for more than 10 days.
The ordeal of tens of thousands of people, mostly from the Yazidi minority, was one of the dramatic chapters of the devastating two-month conflict and one of the reason Obama sent warplanes back over Iraq, three years after pulling his troops out.
"We helped save many innocent lives. Because of these efforts, we do not expect there to be an additional operation to evacuate people off the mountain and it's unlikely we're going to need to continue humanitarian air drops on the mountain," Obama said.
He had warned that a massacre on Mount Sinjar could lead to a genocide against the vulnerable Yazidi minority, whose members are now largely massing into camps in autonomous Kurdistan.
The Pentagon said 4,000 to 5,000 Yazidis remained on the mountain, which legend holds as the final resting place of Noah's Ark, but explained 2,000 "reside there and may not want to leave".
Obama added that the air strikes, first launched on August 8, will go on.
"We will continue air strikes to protect our people and facilities in Iraq," said the president, who cited the risk to the US consulate in Arbil as another reason for the military intervention.
Thousands of people have poured across a border bridge into camps in Iraq's Kurdish region after trekking through neighbouring Syria to find refuge, most with nothing but the clothes on their backs.
Some women carried exhausted children, weeping as they reached the relative safety of the camps.
"Nobody can relax at this point... the crisis continues," Ned Cole, a spokesperson for the UN's refugee agency, said.
The hundreds of thousands of Yazidis, Christians, Turkmen, Shabak and other people who have been displaced in recent weeks have little prospect of returning home any time soon.
Washington has ruled out boots on the ground and the fightback is being led Kurdish forces who, despite Western arms deliveries, have so far contained IS fighters rather than reclaimed large tracts of territory.
The international community had for weeks stressed that no effective counter-offensive could take place without a cohesive government steering the country.
Obama, the United Nations, Iraq's most revered Shiite cleric and even much of his own parliamentary bloc had made it clear that government could not be headed by Maliki.
Observers had said Maliki had reasons to fear for his life or at least his freedom after relinquishing the premiership and could seek to stay in a position of power as a protection.
"I say to you... I do not want any position... my position is your trust in me, and there is no better or more honourable position," Maliki said in his televised address.
His words raised the question of what he do would next, with few obvious options if he wanted to leave the country but no strong power base if he wanted to stay.
#UNSG Ban Ki-moon commends #Iraq PM al-Maliki's decision to withdraw candidature & support al-Abbadi as PM nominee http://t.co/RhUn92b6ts
— UN Spokesperson (@UN_Spokesperson) August 15, 2014
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